Knowing how to buy a foreclosed home in California is a great way to buy properties below market value, which can have a complicated process.
As of January 1st, 2021, investors who win a bid on a foreclosed residential property in California will have to wait 45 days before they can complete the sale. This is because people who want to live in it now have the right to submit competing offers within that period. Tenants who live in that property could win by matching the investor’s offer, while other buyers must outbid the investor.
While this increases your risks when buying foreclosures, it is still one of the best ways to get a property for a lower price. You only have to be smarter about it.
In this guide, you will learn about foreclosed homes in California, which includes:
- What a foreclosure is and how the process works
- The three stages of foreclosure and how you can buy a property at each stage
- The seven steps to buying a foreclosed home in California, from financing to closing
What Is a Foreclosure?
Foreclosure is the process where the lender seizes the mortgaged property from a borrower who has not paid for at least three months. They would then put up the house for auction in hopes of recovering the rest of the borrower’s outstanding balance.
Foreclosing on homes is a very slow and costly process, depending on the governing state where the lender files it. In California, for example, this can take over 200 days.
If the lender and the homeowner have not worked out a repayment plan, the lender will file a notice of default with the governing county. They can do this at least 30 days after contacting the homeowner for the foreclosure avoidance assessment.
Most foreclosures in California do not need to go through the court system except for extreme cases. The state has also imposed protections for homeowners who have had their homes foreclosed on. This includes their right to pay off their debts and regain ownership of the house up to five days before the lender sells it. This increases your risk of buying foreclosed properties.
When buying a foreclosed home, you will be dealing with the mortgage lender or its trustee, not the homeowner. Attending public auctions is usually how to buy a foreclosed home in California, but there are other ways you can get one.
Stages of Foreclosure
How to buy a foreclosed home in California depends on which part of the process it is currently in. There are three stages of foreclosure:
Stage 1: Pre-foreclosure
In this stage, the lender has notified the homeowner that they will foreclose on their house if they do not continue paying their loan. This usually happens after the homeowner has not paid for three months or more. They would then have three months to make their loan current. If they cannot do this but want to avoid foreclosure–which could ruin their credit for several years–they have two options:
- Sell their home’s equity. This is only possible if the property’s sale price is enough to cover the homeowner’s mortgage and closing costs without the need to pay out-of-pocket.
- Do a short sale. If their house is worth less than the outstanding loan amount, then the homeowner needs to request their lender’s approval to do a short sale. This will let them sell the property at market value and use the proceeds to repay the lender, who will then forgive the remaining balance. A short sale will still damage the homeowner’s credit score even if they took steps to repay their loan.
As a property investor, you would want to buy pre-foreclosure homes. This is because you can negotiate a lower price with the homeowner, whose aim is to sell their home to avoid foreclosure and save their credit score. You will also be able to inspect the property before buying it.
Stage 2: Foreclosure Auction
If the delinquent homeowner could not repay their lender or sell their property, then the lender puts it up for auction. Many property investors have found amazing deals at foreclosure auctions. But the process is still risky since you may not inspect the house or check for title issues beforehand. If you are not careful, you might end up buying a home that needs significant repairs and renovations that will eat up your budget.
If this was not risky enough, the state government has made buying a foreclosed home in California more difficult for property investors. SB 1079 or Homes for Homeowner, Not Corporations, took effect on January 1st, 2021. Under this law, owner-occupants, tenants, local governments, and housing nonprofits have 45 days to match or outbid the offer if an investor wins a bid for a residential property.
Stage 3: Bank-Owned or Real Estate Owned (REO) Properties
If the mortgage lender fails to sell the foreclosed house at auction, then they will seize it, evict the occupants, and sell it in a traditional manner. They will also fix up the place, clear the title, and follow state regulations when selling. The home may have a higher sale price at this stage compared to the previous two stages, but you may be able to inspect and appraise the property before making an offer.
These are the different ways on how to buy a foreclosure in CA depending on what stage the property is in. While purchasing one that is in pre-foreclosure may get you the best deal, you could still keep an eye out on public auctions and REO listings in case you find a great home.
7 Steps on How to Buy a Foreclosed Home in California
When you buy a foreclosed home at any of the three stages, there are seven steps you will have to go through, one of which is optional:
Step 1: Get Pre-approved for a Mortgage
Getting pre-approved or pre-qualified for a mortgage means submitting your financial information to a lender. If you are pre-approved, they will give you a pre-approval letter showing that they could give you a home loan up to a certain amount. You could also use this letter as proof that you can afford to pay with the pre-approved amount, which would set you apart from other homebuyers.
Note that if you are buying a foreclosure at an auction, you are likely required to pay in cash. If you do not have enough cash to pay for a foreclosed home, consider securing financing through other means like borrowing from friends and family, getting a home equity line of credit (HELOC), or withdrawing funds from your 401k or IRA.
Step 2: Hire a Real Estate Agent (Optional)
If this is your first time buying foreclosed homes, you will have an easier time navigating the process with the help of a real estate agent. They can:
- Negotiate on your behalf
- Tell you about any local regulations that you should be aware of
- Help you draft an offer letter
- Inform you of any issues to look out for
- Answer any questions and concerns you may have about the process
You can use this opportunity to learn more about buying foreclosures, so you could choose to do it by yourself next time.
Step 3: Search for Foreclosed Homes
Finding a foreclosed property for sale that is worth investing in takes a lot of time and patience. You must also know where to look. Fortunately, there are several ways you can do this:
- Your real estate agent. If you decide to hire one, they can search on your behalf and let you know of any foreclosed listings that meet your criteria.
- Search engines. When you type “foreclosure listings near me” on your search engine of choice, they should show you a number of websites that feature such properties.
- Real estate websites. Most real estate websites feature pre-foreclosures, homes up for auction, and REO properties. As an investor, the best platform you could use is Mashvisor Property Marketplace.
Mashvisor has been helping real estate investors find properties of different types including off-market, foreclosures, and tenant-occupied rentals. You could use our website for your comparative market analysis or for acquiring your next rental property. We also have a state-of-the-art investment property calculator on each listing page, which you can use to analyze your projected income and investment payback.
Step 4: Submit Offers or Make Your Bid
You will also need a lot of patience here, as you might end up writing a lot of offers before a seller accepts yours. The same goes for public auctions; you may have to outbid several other interested buyers to win the property you want. When bidding on a house, you need to set a maximum purchase price beforehand so that you do not end up overspending just because you got too competitive.
Tip for bidders: Check how long a property has been unoccupied before deciding on your maximum bid price. If it has been vacant for a long time compared to the other houses, leave more room for your renovation budget and prepare a low bid. But if it just hit the market, be prepared to offer the highest amount that you are willing to pay for.
Step 5: Secure Your Property
When buying a foreclosure, most of the time you are buying it as-is. You cannot negotiate for the seller to make repairs so you can buy their home. And when bidding on a property, you may not be allowed to do an inspection prior to the auction.
So once the seller has accepted your offer or bid, your next step is to get the house inspected, run a title search, and buy title insurance. If possible, get these done before exchanging money. Many foreclosures contain major damage to the structure, the foundation, or the land. You would also want the title to be clear of liens or encumbrances. The title insurance protects your ownership rights to the property.
Step 6: Get the Home Appraised
A home appraisal is an independent, unbiased licensed professional that assesses a property’s market value. They base it on comparable sales in the neighborhood and market as well as the condition of the property.
This is usually required by traditional mortgage lenders before they approve the loan. But if you paid in cash or took out a non-traditional loan, getting your new property appraised would let you know if you could refinance it to pay off your loan or fund the renovation.
Step 7: Close the Sale
Once you have secured the property and are happy with it, it is time to pay for the full amount of the asking price and sign the closing paperwork. If you win a bid at an auction, you have to pay either immediately or the following business day, so you might have to do this first before proceeding to steps 5 and 6. The occupant of your property has a few days to vacate the house.
Also, do not do anything to the property until you have the certificate of sale, your property title, and title insurance. Because of SB 1079, someone else might match or outbid your offer within 45 days.
Find Your Next Foreclosed Property on Mashvisor
Foreclosure is a long and costly process in which the lender tries to collect money that a delinquent homeowner owes them. To pay back their defaulted loans, they must either sell their home’s equity or do a short sale, though the lender must approve the second option beforehand.
If the homeowner fails to pay their loan within a set period, then the lender seizes the property and puts it up for auction. Thanks to SB 1079, buying a foreclosed property at an auction in California is now 45 days longer. Thus, you might have a better chance of getting a good deal from buying pre-foreclosures or REO properties.
But once you acquire your foreclosed property, that is when the real work begins. You will have to renovate the house and make it liveable and attractive for would-be tenants, guests, or buyers. And when you are done, whether you are putting it up for sale or rent, you could either sit back and watch the money come in, or you could move on to your next project.
Now that you know how to buy a foreclosed home in California, feel free to try out Mashvisor to find your next rental investment. Not only can you use our platform to find thousands of listings across the US, but you can also use it for your research and comparative market analysis. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.